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Uber Could Finally Be Set to Pay Off

Uber Could Finally Be Set to Pay Off

Trade summary: A bull call spread in UBER using the March 20 $41 call option which can be bought for about $2.03 and the March 20 $44 call could be sold for about $1.02. This trade would cost $1.01 to open, or $101 since each contract covers 100 shares of stock.

In this UBER trade, the maximum loss would be equal to the amount spent to open the trade, or $101. The maximum gain is $199 per contract.  That is a potential gain of about 97% based on the amount risked in the trade.

Now, let’s look at the details.

After reporting earnings, MarketWatch noted that “Uber Technologies Inc. (Nasdaq: UBER) is ready to join the ranks of Facebook Inc., Amazon.com Inc., Netflix Inc., and Alphabet Inc.’s Google.

RBC Capital Markets analyst Mark Mahaney reiterated his view that FANGU was perhaps a better acronym for big internet companies than the traditional FANG moniker, adding Uber, to the mix as the ride-hailing giant seeks to take advantage of its massive scale while working toward profitability.”

This vote of confidence comes as the stock soared on earnings.

UBER daily chart

The gain is due to the hope that the company will be profitable later this year. The earnings report, as all previous earnings reports since the company began trading last year, showed a loss.

Specifically, Uber’s revenue rose 37% from a year earlier to $4.1 billion, beating the average analyst forecast of $4.05 billion. This was also faster than the 30% growth in the quarter that the company posted last quarter.

Uber attributed its growth to its ride-hailing business. The company said its gross bookings for rides grew 28% over last year to $18.1 billion.

While Uber reported faster growth in sales, the company still lost $1.1 billion in the fourth quarter, which is more than the $887 million it lost a year earlier. This was a loss of $0.64 per share for the quarter, which beat analyst’s average estimates which called for a loss of $0.67 per share.

For all of 2019, Uber’s net loss totaled more than $8.5 billion. But it beat analyst’s estimates on per share loss for the fourth quarter.

But the company’s CEO said Uber is now targeting profitability in the fourth quarter of 2020, earlier than its previous forecast of 2021.

MarketWatch noted, “Uber’s commentary around its outlook drew cheers from Bernstein’s Mark Shmulik, who was encouraged that the company gave better disclosures. “The transparency from management was welcome, ambitious, and hammered home a message of profitable growth,” he wrote. “Now, all Uber needs to do is go an execute against these goalposts.”

With the gains, the stock is now back near its IPO price.

UBER weekly chart

This is an optimal time to consider entering the trade, since there is little resistance on the chart and a sharp rally is possible.

Buying shares of the stock exposes traders to significant risks in dollar terms. A spread trade with options allows traders to obtain exposure to the stock with a defined level of risk. That strategy is explained in detail below, at the end of this article.

A Specific Trade for UBER

For UBER, the March 20 options allow a trader to gain exposure to the stock. This trade will be open for about six weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.

A March 20 $41 call option can be bought for about $2.03 and the March 20 $44 call could be sold for about $1.02. This trade would cost $1.01 to open, or $101 since each contract covers 100 shares of stock.

The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.

In this trade, the maximum loss would be equal to the amount spent to open the trade, or $101.

The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.

For this trade in UBER the maximum gain is $199 ($44- $41= $3; $3 – $1.01= $1.99). This represents $199 per contract since each contract covers 100 shares.

Most brokers will require minimum trading capital equal to the risk on the trade, or $101 to open this trade.

That is a potential gain of about 97% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.

A Trade for Short Term Bulls

As with the ownership of any stock, buying UBER could require a significant amount of capital and exposes the investor to standard risks of owning a stock.

To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.

Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.

To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.

This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.

bull call spread

Source: The Options Industry Council

Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.

This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.